Should I Take RMD Monthly or Annually?

A Required Minimum Distribution, or RMD, is a mandatory annual withdrawal from certain retirement accounts. These distributions are enforced by the IRS to ensure that individuals eventually pay taxes on their tax-deferred savings. RMDs apply to accounts like traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k)s. However, they are not required for Roth IRAs during the lifetime of the original owner.

The SECURE 2.0 Act raised the age for beginning these distributions to 73. For those born in 1960 or later, this age will increase to 75. You can delay your first RMD until April 1st of the year after you reach the required age, but your second RMD is still due by December 31st of that same year. Taking two distributions in one year could increase your taxable income. If you are still employed by the company that sponsors your 401(k) and do not own more than 5% of the business, you may delay RMDs from that plan until you retire. This exception does not apply to traditional IRAs.

Once you begin taking distributions, you must decide how frequently to do so. The most common options are a single, lump-sum payment annually or twelve monthly installments. This choice depends on your personal cash flow needs, investment philosophy, and tax situation.

The Case for Annual RMD Withdrawals

Opting for a single, annual withdrawal allows your investments to remain in a tax-deferred environment for most of the year. By waiting until late in the year to take your RMD, you give your account balance more opportunity to grow. This strategy is appealing to those who do not rely on RMDs for monthly living expenses and want to maximize investment returns. The simplicity of a single transaction also reduces administrative effort.

This approach has risks, with a drawback being exposure to market volatility. If the market experiences a downturn right before your planned withdrawal, you will be forced to sell more shares at a lower price to meet your distribution amount, which can negatively impact your portfolio’s value. This strategy prioritizes long-term growth over short-term income stability and is better for those with other income sources who are comfortable with market fluctuations.

The Case for Monthly RMD Withdrawals

Taking your RMD in twelve equal monthly installments can create a predictable stream of income, much like a paycheck. This is helpful for managing your monthly budget and covering regular living expenses. Receiving a consistent amount each month helps you plan for financial obligations without a large, one-time budget adjustment.

This method also helps mitigate the risks of market timing. By spreading withdrawals throughout the year, you engage in a form of reverse dollar-cost averaging. You will sell shares at various price points, which can smooth out the impact of market volatility and is a more conservative approach.

The trade-off with monthly withdrawals is that funds taken out earlier in the year will no longer benefit from potential tax-deferred growth. This means you could miss out on some investment gains if the market performs well. This choice often comes down to a preference for a stable income stream or greater long-term growth.

Tax and Portfolio Management Considerations

From a tax perspective, a large annual withdrawal can be timed with estimated tax payments, simplifying the process. Monthly withdrawals allow for more consistent tax withholding throughout the year, which can help you avoid potential underpayment penalties. A large, lump-sum distribution could also push you into a higher tax bracket for that year.

From a portfolio management standpoint, an annual withdrawal requires a single rebalancing event. You will need to decide which assets to sell to meet your RMD, which can impact your overall asset allocation. Monthly withdrawals allow for a more gradual approach to rebalancing, sourcing funds from dividends or by trimming overweighted positions to maintain your desired asset allocation.

Implementing Your RMD Withdrawal Strategy

Once you have decided on a withdrawal frequency, contact your financial institution or brokerage. For monthly withdrawals, you can set up an automatic transfer from your retirement account to your bank account. This ensures you will receive your RMD payments on a regular schedule without further action.

If you opt for an annual withdrawal, you must manually initiate the transfer before the December 31st deadline. Failing to take your full RMD results in a penalty of 25% of the amount that was not withdrawn. This penalty can be reduced to 10% if the shortfall is corrected within two years.

Regardless of the method, contact your financial institution to understand their specific procedures and any potential fees associated with withdrawals. They can help you set up your chosen plan and ensure you are in compliance with IRS regulations.